King Companies, Inc. (KCI) is a private company that owns five
auto parts stores in urban Los Angeles, California. KCI has
expanded from two auto parts stores to five stores in the last
three years, and it plans continued growth. Eric and Patricia King
own the majority of the shares in KCI. Eric is the chairman of the
board of directors and CEO of KCI, and Patricia is a director as
well as the CFO. Shares not owned by Eric and Patricia are owned by
friends and family who helped the Kings get started (Eric started
the company with one store after working in an auto parts store).
To date, Eric has funded growth from an inheritance and investments
from a few friends. Eric and Patricia are thinking about expanding
by opening three to five additional stores in the next few
years.
In October 2021, Eric approached your accounting firm, Thornson
& Danforth, LLP, to conduct an annual audit of KCI for the year
ended December 31, 2022. KCI has not been audited before, but this
year the audit has been requested by the company’s bank because of
anticipated bank loans and by a new private equity investor that
has just acquired a 20% share of KCI.
KCI employs 20 full-time staff. These workers are employed in store
management, sales, parts delivery, and accounting. About 40% of
KCI’s business is retail walk-in business, and the other 60% is
regular customers where KCI delivers parts to their locations and
bills these customers on account. During peak periods, KCI also
uses part-time workers.
Eric is focused on growing revenues. Patricia trusts the company’s
workers to work hard for the company and she feels they should be
rewarded well. The accounting staff, in particular, is very loyal
to the company. Eric tells you that the accounting staff enjoys
their jobs so much they have never taken any annual vacations, and
hardly any workers ever take sick leave. There are two people
currently employed as accounting staff, the most senior of whom is
Jonathan Jung. Jonathan heads the accounting department and reports
directly to Patricia. He is in his late fifties and hopes to retire
in two or three years and move away from Los Angeles. Jonathan
keeps a close watch on accounting and does many activities himself,
including opening mail, cash receipts and vendor payments,
depositing funds received, performing reconciliations, posting
journals, and performing the payroll function. The second employee,
Abby Owens, is a recent college graduate who just passed the CPA
exam. Abby is responsible for the payroll functions and posting all
journal entries into the accounting system. Jonathan and Abby often
help each other out in busy periods.
Gather information: You have access to the following
information for KCI:
1. | Prior period financial statements. | |
2. | Budgets for the current year. | |
3. | Industry comparisons. |
Plan, in detail, the types of analytical procedures the audit team will use to gain an understanding of KCI.??
The types of analytical procedures the audit team will use to
gain an understanding of KCI:
*The audit procedures described below can be used as substantive
analytical procedures in order gain an understanding of KCI:
1.Inspection
2.Observation
3.External confirmation
4.Recalculation
5.Reperformance
6.Analytical procedure
7.Enquiry
*Analytical procedures may help identify the existence of unusual
transactions or events and amounts, ratio and trends . This unusual
or unexpected relationships that are identified will help in
assessing the risk of material mistatement in the KCI.
*Audit procedures are of two types which helps in understanding the
entity and its environment:
a)Risk assessment procedure(RAP) :it will help in assesing risk of
material mistatement in the entity.
b) Further audit procedures(FAP) :It cna be further divided
into
*substantive procedures
°test of details
°substantive analytical procedure
*Test of control
Risk can be identified in the entity at two levels first, financial
statements level and second assertion level(Account balance,
transaction, presentation and disclosure)
By doing above audit team will gain an understanding of KCI.
King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban...
What are the fraud risk factors of KCI, why are they risks, and how will the risk affect my approach to the audit of KCI? King Companies, Inc. King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCl has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI....
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